SCHATZKER: The characters in the book itself are wonderfully eccentric and certainly unusual. Does that help explain why they found this incredible trade that most everybody else missed?
LEWIS: This is one of the great mysteries of the last few years in finance. There emerges on the scene this really, really smart trade, buying credit default swaps on subprime mortgage bonds. You’re buying insurance on subprime mortgage bonds. Limited downside: You’re paying a couple of percent premium a year for a bet that, maybe it’s not sure to pay out, but the odds are better than 50-to-1 that they will. It’s a really obvious, smart bet.
And many thousands of investors could have made this bet. Not individual investors, for the most part, but a lot of institutional investors could have made this bet. In the end, only about a dozen make it in a huge way. A lot of people dabble in it, but only about a dozen make it in a huge way. I got to know most of the people who did, to do this book. I did a kind of casting search.
Most of them are outsiders, are people who are kind of on the fringe, certainly on the fringe of the credit markets. They’re not people who are bond market people. They were, for the most part, stock market people, crawfished into it because they could see that the stocks that they were trying to understand were going to be driven by this event that was going on in the subprime mortgage market.
So they had to understand the subprime mortgage market. And then the more they came to understand it, the more appalled they were about how that market worked. And the more appalled they became, the more they began to think about really how to bet against it.
So they were outsiders to the market that they were betting on. And in addition, they were, in many cases, personally curious people, not clubbable members of the group. And I think that was a key to the success. I think that the fact that they didn’t feel compelled in any way, on any level, to think like other people gave them an advantage.
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